Budget 2015: Big Ideas Or Small Changes?

It’s Finance Minister Arun Jaitley’s 2nd budget, but the first full year budget and hence the first opportunity to actualise his government’s fiscal and tax agenda. But a meagre economic recovery and less than buoyant tax collections present him with 3 dilemmas:

- He needs to boost investment, consumption and yet raise revenue and demonstrate fiscal responsibility- He needs to start reducing the number of industry specific incentives towards a simpler tax code and yet provide tax support for key government policies like ‘Make in India’- And he needs to expand the tax paying base but without upping tax aggression

Will Budget 2015 be one of big ideas or small changes? EY’s Sudhir Kapadia, PwC’s Ketan Dalal and Dhruva Tax Advisor’s Dinesh Kanabar share their views.

Kapadia: My view is as follows. One is as we all know it is the fiscal deficit that is not looking very good because the revenue collections are not looking very good.

From a macroeconomic perspective I do not know the answer whether the FM would be comfortable in breaching that 4.1 percent and there are economies to argue what is wrong with it, if it is for the right reason and by the way it should be for the right reason because if you see the percentage of spend on capital creation, it is still very low, in a single digit.

So, if at all he thinks about it, in my view it should be only when you are confident of spending much more on creating capital assets.

So, having said that-so that is one part on the revenue front-so, if you keep that in mind then you say that the greatest challenge according to me which the FM will face is to how to put more money in the hands of individual tax payers on the one hand.

One because you obviously hope to kick start more demand in the economy, two because there could be some political overhang due to recent events like the Delhi results and you want to give some good news as well to a certain category of tax payers and then three is on the other hand you need to then clearly expand the tax base because if you look at the tax GDP ratio, the needle is not moving, it is still between 10-11 percent. Agriculture is exempt, all that is fine but I don’t think with these kind of pressures which he has he can really do much to give away and look at the other way, look at the corporate side. A dividend distribution tax of Rs 25,000 crores is being collected. So, you say okay, reduce the effective corporate tax rate and do away with DDT. In my view, he cannot do away with it. It has to shift to taxation in the hands of individual shareholders. He cannot do away with Rs 25,000 crores. Surcharges, he can’t do away with in this year because the leeway is limited, so his hands are quite tied.

Menaka: On the one hand you are saying he ought to do away with it to put more spending power in the hands of companies (interrupted)

Kapadia: Individuals he will try and put more money, but on the corporate side the interesting debate could be that we have talked about not having profit linked incentives; we have talked about not having exemptions which distort corporate behaviour-that could be a great trade-off, remove the surcharges and remove some of these exemptions.

Menaka: In a nutshell, what are you expecting? Are you expecting big tax changes, relief for tax paying individuals, for corporations, an effort to boost investment and consumption in the country or you’re expecting a very conservative Budget because revenue collection is an area of concern?

Kanabar: I do hope it is not a conservative Budget for the sake of this country because - tell me in the last six months, we were talking about ‘Achhe Din’ and whatever else, how many new projects have you heard being taken up by any industrial house? Tell me this is the new factory coming up; this is a new production thing coming up, so we need to revive capital spend, that is inevitable and the government’s role in that is also inevitable. So, I hope that this is not one of those conservative Budgets; I hope it does something more.

Second, what have you heard in the recent past?

The word ‘tax terrorism’ began at a point of time when the elections were there but even now you hear that whenever Mr. Modi went to USA, he met up with the CEOs and the consistent thing he heard was that tax was becoming an important deterrent.

Will we able to send out a message this time that we want to bring out stability in the tax regime?Sudhir spoke and I would totally agree with him about the need to expand the tax base and again there are a number of suggestions which have been given. I mentioned to you earlier about Federation of Indian Chambers of Commerce and Industry (FICCI) having undertaken a report where we invited about eight or ten top tax experts, people within industry to come back and say, what is it that gives rise to black money and how can that money be channelized.

So, leave aside the money that is lying overseas, leave aside the agricultural income; leave these two white elephants aside and then look at what are the other things where the government can actually plug the leakages? If all of those are taken care of, we really will see a buoyancy of tax collection, we will see capital spending expansion of the economy and if that does not happen, we have a challenge.

Dalal: As Dinesh shared that we do hope that this is not a conservative Budget. The real issue is – I do not think that the Finance Minister has a choice but to do something to boost both consumption and investment. The 4.1 percent, yes we all know. Now you have divestment in the next couple of months but even in the next year, then spectrum auctions, so given all that and also given the historical trend that when you do have incentives and when you do have growth, there is buoyancy in tax collection; history has shown that. So, I don’t think there is much of a choice and some chance will have to be taken.

One point which is important is that this is one of the few budgets where people are waiting to see how do the proposals in the Budget dovetail in the themes of the government. And in the manifesto they had talked about, of course, non-adversarial simplicity dispute resolution as one basket so to speak, GST of course the second basket and the third they did talk about incentives for research and development in innovation and then after that the ‘Make in India’ part has got added to it, so there should be some incentives for that. Incentives do distort the system but I don’t think there is much of a choice.

Kanabar: I would make one small point. There were so many good proposals which were introduced in the last Budget which have not got implemented.

Menaka: For instance?

Kanabar: Take for example there was a proposal that authority for advance ruling will be applicable to residents, where are the benches constituted, where is the movement there. There is a proposition that a committee would be set up to look into important tax matters, that committee got considered just about a month and half back and nothing at all has happened. So, it is more about the robustness of implementation also of many of the proposals than just the proposals coming about.

Kapadia: If you look at in the last one or two years I have not seen the industry clamour so much about exemptions as they have been clamouring for tax certainty and stability.

Menaka: I am going to counter that by exactly the response that I got from all three of you saying he needs to do more to put money in the hands of businesses and individuals, how is he going to do that?

Kapadia: I said individuals, not businesses.

Menaka: Only individuals, so does that mean that you are expecting more exemptions for individuals or let’s say, doing away with the lowest tax slab altogether?

Kapadia: I would say with inflation, increase the exemption limit or give a deduction because in my view he will choose between the two, he will choose to put more money in individual’s hands, not in the hands of corporates, is what I am saying.

Menaka: Do you agree with that, because you made the pitch for more investments by corporate India and some tax support in the Budget for that. How will that happen?

Kanabar: I will put three propositions. First, so far as individuals are concerned, apart from exemption limits which is alluded to and where there is certainly a case for astralisation and given the inflation and whatever else, there is also this need to ensure that some of those exemptions or deductions for housing loan interest need to be enhanced considerably and that can again go a long way in bolstering demand. That is point number one I would make.

Number two, what I would say is that he needs to ensure that corporates start undertaking capital expenditure and I totally agree with the point Sudhir is making that corporates are looking for certainty, but it is important that the government spending goes up.

Menaka: Many economists are seconding that view as well that let public spending sort of lead the return in private spending and if that means slight slippage in FD targets that is fine with us as long as the quality of spend is good. My point is how is he going to accompany that with any kind of tax incentive/tax policy support to boost private sector investments.

Kanabar: Take for example this acceleration of depreciation; it is not really an additional incentive. It is only an acceleration of what you would have got over a period of time.

Menaka: But we have seen the return of an investment allowance almost two years ago now. So, if he does that it is not really a bigger new idea, so to speak. Are you expecting any big new ideas on that front?

Kanabar: The additional could be that on ‘Make in India’, can we have additional depreciation on investments, can we promote R&D spend? Those would be the key things but again just get back to the certainty issue and that is very critical. Ask any company in this country which has got a section 10A or 10B, Export Oriented Units (EOUs), Special Economic Zone (SEZ) whatever incentives. How difficult it is actually to get those incentives from the tax office, it is illusionary. You talk about section 80-IA, 80-IB, 10A, 10B 10AA which are the sections really today which grant you a tax exemption or a deduction, there is nothing else which is there really today at this point of time. You actually go to the tax office and claim that and there are 100 reasons why it will be denied to you.

Menaka: What should we expect in this Budget, is this Budget going to be a big picture, big ideas, new developments Budget or is it just going to be a Budget of the look we have promised you all this over the last few years, now we are going to make the administration work in your favour?

Dalal: It will be a big picture Budget. As I said, incentivising manufacture or infrastructure growth in any manner and investment elements is an old idea but remember that there is a sunset clause of March 31, 2017; I would not be surprised if that is extended. You look at power sector, that is still 2017, that may happen. Now you may not say it is a new idea.

Menaka: But every year we talk about these sunset clauses getting pushed by a couple of more years because these industries differ?

Dalal: But, this time the ‘Make in India’ thrust etc is really focussed, to my mind at least.

Kapadia: Let us look at it a little differently, same objective, Make in India and everything. What is the amount of sacrifice because of tax exemptions and what is the amount you will lose if you remove the surcharges. Remember, removing surcharges brings your corporate tax rate to 30 percent. I have talked about it since five or six years without success but if you look at it really, brass tracks wise if the corporate rate is 30 percent, you remove these exemptions and this uncertainty associated with the exemption ultimately, as Dinesh said you probably don’t get anything because of the interpretations.

If you ask me what is the big bang, if you really think about it is big bang because you are saying your rate is reduced by four percent, you might streamline Dividend Distribution Tax (DDT) and of course you will streamline exemption make it investment linked versus profit linked.

Menaka: But that maybe delta with only when the direct tax code is rewritten.

Menaka: You are saying do away with surcharges; do away with dividend distribution tax (DDT)?

Kapadia: Whether you can do away with DDT or no, you will not be able to do away it, either you shift it to the shareholders or as Ketan pointed out give a credit.

Menaka: If you shift the burden to the shareholders, this Rs 26,000 crore figure that you spoke of is collections on account of DDT and it could come down substantially because then you would have the variety of shareholders who will seek to see?

Kapadia: We have to analyse whether that will serve the purpose.

Menaka: It will also become more litigious because right now it is a fairly….

Kanabar: One simple thing again to the point which Ketan made earlier is you do not do anything at all, but simply provide that any tax paid by way of dividend although paid by the Indian company will be deemed to have been paid for and or behalf of the company or the investor or shareholder and the non-resident shareholder is able to take a credit for that overseas, that itself is a major issue.

I must share this with you I was at Vibrant Gujarat Summit and sort of talking to number of CEO’s and the issue which came up was that your tax rate today which you are talking as 33 percent once you take dividend distribution tax and everything else associated with it goes to over 44 percent. Is that a fair rate and compounded with the fact that you may not have the ability to take the credit for dividend distribution tax in your home country projects a taxable income there. How will you deal with it?

So, look at the proposal which has just been introduced in USA about a fortnight back. Where the government is saying all money’s which are overseas now you get back to the country you pay tax only at the rate of 14 percent instead of paying the normal tax, one time concession and we will reduce the corporate tax from 35 to 28 percent. Because, now we are going to tax you on all income including our global income whether repatriated into USA or not. Just look at this proposition, there will be several US companies which at this point of time will be looking to extract profits out of India. This is a reality; this is what we are going to see in the next one year. How are we facilitating the reinvestment of that money if we are not allowing them to take credit of that money overseas?

Menaka: I could add to this list a variety of demands that have been pending for some years. For instance, the Minimum Alternate Tax (MAT) issue continues to be sticky whether it is MAT on Foreign Portfolio Investors (FPI) which is a controversy that has sort of re-emerged or MAT on Sezs which is a long pending demand in that sense. Securities Transaction Tax (STT) is something that the market keeps talking about. Is it going to be a Budget that tinkers with all of this and may be cleanse all of these? I am not under estimating the value of this, I am saying that it is great and gives you the certainty that you are looking for and the exemptions that they have promised or big ideas because I am yet to hear a big idea.

Dalal: A MAT on FPI, first of all according to me was never intended to be levied in the first place. It just needs a clarification in the long.

Kapadia: It is the series of ideas whether big or small which put together will make everybody smile. It is not one big idea.

Menaka: Your first input in that series was to enhance the exemptions, deductions available to individuals..

Kapadia: Up to a particular limit not for the rich.

Menaka: The second input was maybe to do away with surcharges is that what you were saying?

Kapadia: And rationalise exemptions as well.

Menaka: The third one was to rationalise dividend distribution tax that is the third pearl in the necklace, so to speak. The fourth, I assume would be MAT on FPI and MAT on SEZs.

Kanabar: It is such an important issue we had this whole issue of MAT on special economic zones which are again, to my mind, retrospective tax. You ask somebody to make an investment, say that it is tax exempted and then you levy book profit tax on it at a later date. You are doing the same thing vis-a-vis FII and FPI. You are saying that your income is exempt, you trade on the stock exchange zero tax you pay STT and then you go back and say you are not required to maintain books of accounts, but, by the way we will assume that you maintain books of accounts and you now pay a book profit tax.

What are you taking about? You are talking about 20 percent tax on profits which are exempt otherwise as it is. So you have substituted what was a zero or 10 percent tax with a 20 percent book profit tax. Is it not absolutely preposterous and while this was not caught on if FII starts getting worried about it can you just imagine the impact of the pullout that will happen? So, when you speak about, you are asking what the big bag idea is. Actually what the government needs to do is not to put axe on its own feet.

Menaka: I finally have a string of pearls approach from the three of you. There is only one last issue that I want to bring up in this conversation about what the government can do and that has to do with expanding the base. It is not necessarily one big bang approach to expanding the base. This needs concentrated effort over years, because it is still a few percent of Indians that are actually paying taxes in the country. I will come back to the FICCI report that you spoke of. Can you share with us two or three of the top ideas that you all have suggested the government to do? GST being one thing that will sort of anyway as collateral benefit do that?

Kanabar: Just look at a number of thoughts which were tabled to the revenue secretary in this regard. A payment system, today you can use cash as payment anywhere, so long as you are not claiming a tax deduction. So you wanted to buy an electronic item you can just go purchase it in cash. How do you target that cash will not be used but you will only make a payment by either a credit card or by cheque for example and we spoke of two different ways to approach it, a carrot and a stick approach. Stick approach hasn’t worked, people will break up invoices and do whatever else and the question was that if for example payments were made by cheque, could a rate of tax, whether it is indirect tax or direct tax. Indirect tax qua the buyer and direct tax qua the seller be a percent point lower than what it would otherwise if the transaction was by cash. If cash could be higher and cheque would be lower, that itself is a very important thing.

We then studied which are the industries which generate and absorb cash. Real estate, jewellery and we have made a number of recommendations of what can be done to streamline that and really that is a mechanism and finally, the only way the government will be able to keep a tab on cash is by having a good IT infrastructure.

Kapadia: The issue is about A: information and B: what do you do with that information and frankly, the third issue is how do you try and ensure to the greatest extent possible that there is no misuse of that information in the form of harassment which is also a fact of life.

Menaka: So, your top idea for base expansion in this Budget?

Kapadia: My own view is – in this country, at this stage, the last thing you want is additional obligations because we are first to bring the trust factor back. Therefore, I would go for increase in information to the extent possible. So the simple thing, like banks you said, okay today you have data of deposits in savings bank. You could say why not to current accounts, why not for the cooperative sector, and you have to do it in consultation with the banks, that it is not an additional burden especially for the cooperative sector but if you do that then the next question comes about – how do you analyse that data and track it?

Today, in any country in the world, you can’t eliminate malpractices by any kind of policing at the micro level. All you can do is gather data, use it sensibly and make something out of it, that is the only way and then have a demonstration effect where you catch people, flog them, show them if you are unfortunate enough to be caught there and that is what the US does.

Dalal: This is a much larger question of tax terrorism, simplicity and dispute resolution and one of the great fears that-take away my incentives, I do not mind paying even a higher rate but give me certainty. The average individual tax payer and in the large country that we have, it is so few of them as a percentage. He is worried that not paying that tax necessarily but simply about the terrorism that can happen. So, having upfront clarity on a variety of issues, having a mechanism to address disputes and third and very importantly, having a time frame to resolution of (interrupted)

Menaka: All this is very good for certainty, what does it do for the tax base expansion?

Dalal: Because what happens is that – Let’s say small retailers; the case with small retailers, I don’t want to pay tax because the minute I come into the tax rate, somebody will harass me. Once an ecosystem is set up where that fear in his mind reduces, over a period of time that base will expand.

Menaka: I am going to end by asking all three of you to be betting men even if you are not and bet on the one change that you expect will happen on this Budget? It could be DDT, it could be MAT; it could be banking transactions tax; whatever it is that you are willing to bet on?

Kapadia: I would say all three of these; surcharges, DDT, MAT, all three would be fine.

Kanabar: I would agree that MAT on both SEZ and FII is something which will definitely be relooked at and hopefully that issue will get resolved.

Menaka: You are betting on MAT and DDT?

Kanabar: Absolutely, MAT and DDT both.

Dalal: The increase in exemption limit from two and a half to three lakh as one. ( interrupted)

Menaka: That is just Rs 50,000!

Dalal: Yes, I know but even that Rs 50,000 I was surprised to hear that it gets so many people out of the tax net and that is a big worry in the case of the government. It is not just the revenue lost, it is the fact that you are unable to trace them there so to speak and the second is investment allowance. They will come up with an investment allowance maybe from 15 to 20 and maybe for a much larger window, not two years but say five years.